The present markets for preferred-return securities are divided into primary markets—the markets for the sale of newly-issued securities—and secondary markets—the markets for the resale of existing securities. The secondary markets are almost exclusively dealer markets in which dealers hold inventories of securities in order to make markets in those securities. The dealers offer to buy and sell securities at prices which may be changed without notice at any time. The dealers and participants in the market may use computer systems to support communications and their operations, but market itself is not managed by a data processing system.
The costs per transaction of operating a dealer market are such that dealers tend to offer a smaller spread (the difference between the asking price and the selling price quoted by the dealer) for larger transactions (multi-million dollar orders can command a tight spread). Investors must hold a variety of different securities in order to achieve a relatively safe degree of diversification. Thus, a tendency toward large transaction sizes induces all but the largest investors (funds providers) to refrain from direct participation in present markets for preferred-return securities.
Because present markets for preferred-return securities practically exclude all but the largest investors from direct participation in the market, most investors can economically invest in preferred-return securities only through the services provided by a large financial institution such as a mutual fund company or an insurance company. However, the management fees and other costs charged by these large institutional money managers generally consume a significant proportion of the return received by the investors—a significant problem for the investors.
Presently, vital market information for preferred-return securities is not available to all of the investors. The present markets do not provide data on certain current trades (e.g., price or volume)or data on current bid-ask prices from competing market makers. As a result of this lack of data, even large, sophisticated investors may suffer from high costs for transactions as a result of making trades at prices other than the best currently available price. (It is in the interest of the dealers to withhold information from investors because the information advantage possessed by the dealers enables the dealers to profit at the expense of the investors.)
The Securities and Exchange Commission (SEC) is currently attempting to reduce some of the current inequities of the present secondary markets relative to investors by requiring dealers to report at least some portion of actual transactions including amounts and prices. However, this change will not level the playing field for market participants because dealers will still maintain a large information advantage over investors.
Although the primary markets for the great majority of preferred-return securities are negotiated markets, the primary markets for a few preferred-return securities are operated as auction markets. However, with the exception of the primary market for U.S. Government securities, participation in these auctions tends to be limited to dealers in the secondary markets. Even in the primary market for U.S. Government securities, participation of investors who are not dealers is limited to non-competitive bids—i.e., these investors must commit to purchase a stated amount of new securities at whatever price and return is determined by the auction. Present auction primary markets are limited to relatively large transactions because participation is largely restricted to dealers and dealers must purchase securities in quantity in order to operate efficiently.
In negotiated primary markets the funds user negotiates the terms of the securities offering with an investment banker. The investment banker may guarantee the terms of the offering or may only attempt to place the issue on a best efforts basis.
The transactions costs in negotiated primary markets are sufficiently high that only large transactions are economical. Because the present primary markets for preferred-return securities (both auction and negotiated markets) are suitable only for rather large transactions, most funds users are shut out of the market for long-term capital because they are too small to be able to issue preferred return securities.
Therefore, the background of the present invention reflects many problems, both on the issuer and investor side. No resolution of the problems has been forthcoming, leaving funds users unable to access long term capital and investors unable to optimize their investment portfolios.